Special Repo Rates



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    • Graduate School of Business, Stanford University. I am grateful for funding from The Catalyst Institute (formerly known as The Midamerica Institute) and for discussions with and comments from Emilio Barone, Sushil Bikhchandani, Fischer Black, Ken Durrett, Elizabeth Glaeser, Ayman Hindy, Chi-fu Huang, Ming Huang, Charlie Jacklin, Ravi Jagannathan, Koichiro Kamada, Rui Kan, Allan Kleidon, Paul Knapp, Joseph Langsam, Bob Litterman, George Oldfield, Paul Pfleiderer, Vince Reinhart, Scott Richard, Rishin Roy, David Runkle, Myron Scholes, David Simon, and Paul Spindt; and especially for extensive comments from David Beim, Mark Fisher, Koichiro Kamada, Roger Kormendi, Stephen Lumpkin, Eduardo Schwartz, René Stulz, and Tom Wipf. This article has been presented at the Federal Reserve Bank of Atlanta Conference, The University of Minnesota, The University of California at Los Angeles, Columbia University, Goldman Sachs, Tulane University, The University of Indiana, The Midamerica Institute's Conference on Treasury Markets, The California Institute of Technology, The Bank of Japan, Tokyo University, Morgan-Stanley and Company, and at the annual meetings of the ORSA-TIMS and of the American Finance Association. I also thank Robert Ashcroft, Ming Huang, and Michelle Dick for research assistance, and Suzanne Hammond of Catalyst Institute for assistance in obtaining data. My biggest debt is to Mark Fisher, for many useful and stimulating discussions that have heavily influenced this article.


This article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements. A repo rate is, in effect, an interest rate on loans collateralized by a specific instrument. A “special” is a repo rate significantly below prevailing market riskless interest rates. This article shows that specials can occur when those owning the collateral are inhibited, whether from legal or institutional requirements or from frictional costs, from supplying collateral into repurchase agreements. Specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials.